As you are probably aware, we are in a time of change in the housing market. There is much discussion in the press about declining sales, property values, foreclosures and the economy in general. You might be wondering how this affects your tax bill.
What is Taxable Value?
In 1994, Michigan voters approved the constitutional amendment known as Proposal A. A term known as “Taxable Value” was created as a part of this legislation. Before the enactment of Proposal A, some homeowners were being taxed out of their homes because the value of their home was rising so quickly. The intent of Proposal A was to contain or limit how fast the value used to calculate taxes could increase in any given year and this created what is known as taxable value. Now with Proposal A, your taxable value is only allowed to increase by the rate of inflation or 5%, whichever is less.
Since 1994 and the enactment of Proposal A, in many parts of the State, housing values have been increasing much higher than 5% annually. The good news about Proposal A is that even if your home value went up 10%, your taxable value could only go up 5%. The affect of this was to contain or control how much you are paying in property taxes from year to year. Since 1994, the highest rate of inflation used to determine a taxable value increase has been 3.7%. We have never reached the cap of 5%.
For the most part, Proposal A has been very beneficial for Michigan taxpayers. The bad news is that in a slowed real estate market as we have today, we will still see an increase in taxable value by the rate of inflation, even though the market value in many areas is declining. This may seem unfair, but you should remember, in good years, your property value may have increased 8-10% annually, but the increase in your taxable value was capped at the rate of inflation.
What is SEV?
The assessed value or SEV is the “state equalized value” of your home as determined by the Assessor’s Office. This number is calculated by looking at recent sales and other data to reflect 50% of the true market value of your home. Unlike taxable value, this number has no cap. It will go up and down just as the market does; however, you have to remember that there is a delay in the process. Historically, assessments are calculated using sales data from the previous two years. Because of the declining real estate market, the State is now allowing assessors to use sales from a one year period and, in some cases, foreclosure data. This will allow us to better reflect the more recent pricing drops in the market place. However, the State requires assessors to only use actual sales that have occurred from October 1, 2006 to September 30, 2007, not the list prices of homes currently on the market. It is also important to remember that the amount that you owe in taxes is generated using the taxable value, not this SEV number.
Will my SEV and Taxable Value ever match?
That depends. If you have lived in your home for a long time, probably not. Remember that your taxable value was going up by 5% or less a year, but your SEV was going up by a higher number in most years. This has caused, for many owners, a significant difference between the SEV and the taxable value for their property since Proposal A began in 1994.
For residents who have purchased their property in the last few years, they will have noticed the uncapping affect of Proposal A. When property sells, the assessor must adjust, or uncap, the taxable value. The taxable value will become equal to the SEV. In the year following a transfer or sale, the process starts over again where the taxable value increases 5% or the rate of inflation, whichever is less. SEV then continues to rise or fall as the market place does.
Will my Taxable Value ever decrease?
Yes. If the SEV falls below your taxable value, then yes. Because of the large gap between the SEV and taxable value, we will need to have a very long down turn in the housing market before this will happen for most property owners. It is possible for some who have recently purchased their homes to see this happen sooner. Under certain circumstances, the assessor can make adjustments to the SEV, but the taxable value cannot be adjusted since it is a formula determined by Proposal A.
The following chart illustrates how SEV and taxable values move in both a positive and declining real estate market. Example: $200,000 home purchased in year one.
Year 1 - 5
Year 6 - 9
Year 10 - 11
|House market increase 8%
||House market decrease -1%
||House market decrease -5%
||SEV going up just as the market does, Taxable Value capped at inflation rate.
||SEV going down, Taxable Value still increasing per inflation rate.
|Year 10 (Uncapped)
||House Sold in Year 9.
||Taxable Value goes down because it can not be higher than the SEV.
In summary, for many years homeowners have benefited from Proposal A. It has capped or limited the value used to calculate annual taxes to a level that is more sustainable. Proposal A does not work as well in a declining market because property taxes are driven by the taxable value, which increases annually by the rate of inflation, determined annually by the State of Michigan. As a result, taxable value often lags behind the state equalized value and can increase even though there may be a decrease in the state equalized value.